Housing Trends and Affordability - December 2021

Highlights

  • Soaring prices, higher mortgage rates walloped affordability in the third quarter: RBC’s aggregate measure for Canada jumped 2.0 percentage points to 47.5%—the worst level in 31 years. It came on the heels of a huge 2.7 percentage increase in the second quarter that completely reversed improvements at the start of the pandemic.
  • Only St. John’s bucked the deteriorating trend: The weight of ownership costs got heavier in all other markets we track for both single-family homes and condo apartments.
  • Affordability remains well within historical norms in the Prairies and parts of Atlantic Canada despite recent erosion: The situation has become more severe in Ontario, BC and, to a lesser extent, parts of Quebec.
  • We expect ownership costs to continue to rise quickly in the period ahead: Home prices re-accelerated amid strong demand and scarce inventories this fall. And borrowing costs are poised to get more expensive. Fixed mortgage rates have gone up since summer and we expect the Bank of Canada to start hiking its overnight rate next spring, which would drive variable rates higher. The knock on affordability will be felt across the country.


The pandemic amplified regional divergences

Broad housing trends have been remarkably similar across the country—indeed across many countries—throughout the pandemic. After a wild rollercoaster ride in 2020, it’s now all about intense market heat. Homebuyer demand is supercharged and inventories are near historical lows in virtually every market, creating intense competition between buyers and pressured prices up. These conditions have widely eroded housing affordability in the past year. Yet this has been an uneven process. Some of the least affordable markets (most notably the Toronto area) experienced greater erosion, while more affordable markets (e.g. most in Atlantic Canada and the Prairies) have worsened less. So developments in the past year have generally amplified pre-pandemic affordability divergences across Canada. More specifically they’ve put Toronto and other southern Ontario markets in even less enviable affordability positions relative to the rest of the country, whereas the relative picture generally improved elsewhere, especially in Atlantic Canada and the Prairies. These trends are poised to keep driving some Ontario buyers toward more affordable regions of the country.




Exceptionally tight demand-supply conditions – the story of 2021

The need for more supply has never been greater. This became clearly evident in the past year with bidding wars springing up in places that have rarely or never seen them before, and intensifying in places more accustomed to them. And until demand and supply return closer to balance, prices will continue to rise. Earlier in the pandemic, home buyers benefited from declining interest rates that offset the impact of escalating property values. That’s no longer the case. In fact, interest rates even dented housing affordability most recently. A small increase in the five-year fixed mortgage rate accounted for half the 2.0 percentage-point increase in RBC’s aggregate measure for Canada in the third quarter.

Much of the rebalancing adjustments to come from the demand side

The outlook for buyers is grim. We estimate rising interest rates alone could drive up our national affordability measure another 2.0 to 3.5 percentage points over the coming year. A further 5% increase in home prices would add an extra 2.0 percentage points. Income gains would provide a partial offset. A potentially significant deterioration in affordability could squeeze many buyers out of the market—or at least out of a market or housing category. That would be the market’s self-correcting mechanism at work. So long as supply is slow in coming, much of rebalancing adjustments will fall on the demand side of the equation.

Shifting housing preferences: from the covid shock to the loss of affordability

The pandemic forced Canadians to closely re-examine their housing needs and preferences over the past two years, and it will be the sharp loss of affordability that will keep the process going for new home buyers. Many will cope by driving further (including all the way to another province) until they qualify, or scale down the property they’re going for, or both. Because of already challenging conditions and the fact that rising interest rates will push up ownership costs more in Canada’s priciest markets, we expect buyers in Vancouver, Toronto, Victoria and, to a lesser extent, Ottawa and Montreal to be under the most pressure to reset their expectations.

Fewer compromises needed in Atlantic Canada and the Prairies

While the situation is also getting tougher for buyers in Canada’s more affordable regions, owning a home there generally requires fewer compromises. In fact, most of Atlantic Canada and the Prairies still look reasonably affordable. RBC’s aggregate measures remain well below their long-run averages—and are likely to remain so in the year ahead—in Calgary, Edmonton, Regina, Saskatoon, Winnipeg, Saint John and St. John’s. The latter was the only market bucking the deteriorating trend in the third quarter.


Read the full Housing Trends and Affordability report for extensive market-by-market analysis.

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Robert Hogue is a member of the Macroeconomic and Regional Analysis Group, with RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for the provincial economies. His publications include Housing Trends and Affordability, Provincial Outlook and provincial budget commentaries.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.